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Blockchain Technology Will
Revolutionize The Ecosystem of
The Music Industry
Case study on the music industry
Author(s): Manas Mekala
Mentor: Matt Nys
International Business Management
Management & IT
Academic Year: 2021-2022
Class Group: 301B
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Table of contents
Acknowledgements ................................................................................................................................ 3
Executive Summary .............................................................................................................................. 4
1 INTRODUCTION .......................................................................................................................... 5
2 STATE OF THE MUSIC INDUSTRY ........................................................................................ 6
2.1 Napster era .............................................................................................................................. 6
2.1.1 Rise and fall of Napster ....................................................................................................... 6
2.1.2 Long-lasting consequences after Napster ............................................................................ 8
2.2 Digitalization changing the ecosystem of the music industry ............................................... 12
2.2.1 Introduction of streaming services .................................................................................... 12
2.2.2 Value chain of the music industry ..................................................................................... 17
2.3 Problems within the music industry ...................................................................................... 19
2.3.1 Royalty issues .................................................................................................................... 19
2.3.2 Copyright issues ................................................................................................................ 20
2.3.3 Transparency issues ........................................................................................................... 22
3 EMERGING TECHNOLOGIES ............................................................................................... 23
3.1 Blockchain technology .......................................................................................................... 23
3.2 Smart contracts ...................................................................................................................... 30
4 MERGING BLOCKCHAIN, SMART CONTRACTS AND THE MUSIC INDUSTRY ..... 33
4.1 How blockchain technology and smart contracts can solve problems within the industry ... 33
4.2 Current applications of blockchain within the music industry .............................................. 37
4.3 Barriers and burdens.............................................................................................................. 38
5 Conclusion .................................................................................................................................... 40
6 Works Cited .................................................................................................................................. 41
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Table of figures
Figure 1: Market share of MSS. Source: https://www.midiaresearch.com/blog/music-subscriber-
market-shares-q2-2021 .......................................................................................................................... 12
Figure 2:Spotify Premium price vs per-capita GDP. Source:
https://www.musicbusinessworldwide.com/spotify-doesnt-cost-9-99-everywhere-and-thats-absolutely-
fine/ ....................................................................................................................................................... 14
Figure 3: Streaming pay out and market share of MSS for an independent music label. Source:
https://thetrichordist.com/category/royalty-rates-2/ .............................................................................. 16
Figure 4: Pre-internet value chain of the music industry Source: Disintermediation in the Recorded
Music Supply Chain by Hosoi, Kim, Stainken & Caro (2015) ............................................................. 17
Figure 5: Value chain of the music industry during the internet era. Source: Disintermediation in the
Recorded Music Supply Chain by Hosoi, Kim, Stainken & Caro (2015) ............................................. 17
Figure 6: Value chain of the music industry for smaller/independent artists during the internet era.
Source: Disintermediation in the Recorded Music Supply Chain by Hosoi, Kim, Stainken & Caro
(2015) .................................................................................................................................................... 18
Figure 7: Music piracy related visits. Source: MUSO .......................................................................... 21
Figure 8: Destinations of music piracy related visits. Source: MUSO .................................................. 21
Figure 9: Transaction speed of cryptocurrencies compared to VISA and PayPal -
https://crypto.com/university/blockchain-scalability ............................................................................ 27
Figure 10: Blockchain process steps - Retrieved from https://www.msg-global.com/blog-
item/blockchain-moving-beyond-bitcoin .............................................................................................. 27
Figure 11: Proof-of-Work process - https://www.ledger.com/academy/blockchain/what-is-proof-of-
work....................................................................................................................................................... 28
Figure 12: International Civil Aviation Organization (2020). ICAO Economic Impact Analysis of
COVID-19 on Civil Aviation. - https://www.iea.org/data-and-statistics/charts/world-air-passenger-
traffic-evolution-1980-2020 .................................................................................................................. 29
Figure 13: Global air travel figures ....................................................................................................... 29
Figure 14: 4 phases of the smart contract life cycle - https://arxiv.org/pdf/1912.10370.pdf ................ 32
Figure 15: Comparison of the methods to solve the copyright problem - ............................................. 35
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ACKNOWLEDGEMENTS
First of all, I would like to thank my parents and my brother Manu for providing me the necessary
support and advice throughout my academic career. None of this would be possible without their help.
Secondly, I would like to appreciate and thank Mr Matt Nys for standing by my side whilst making
this thesis. He has had an immense contribution to my thesis with his excellent support, guidance and
feedback throughout the year.
Finally, the completion of this thesis could not have been possible without the expertise of all the
authors in my references list, whom have put weeks and months of hard work to provide the general
public with extensive and knowledgeable reports surrounding this topic.
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EXECUTIVE SUMMARY
Whilst the new wave of digitalization in the 1990s made music more accessible to the general public
through the internet, it had devastating consequences for artists. Napster, a company with a zero-
revenue business model enabled users to pirate music for free. Napster’s story did not last too long due
to lawsuits against the RIAA, which resulted into a chapter 7 bankruptcy for the firm.
Unfortunately, the bankruptcy of Napster was just the start of a 13-year revenue decline for the global
music industry. Napster’s success started a new wave of piracy websites that were virtually impossible
to fight with. For each Napster clone that got deleted, 5 new ones came into place. Visionary Steve
Jobs managed to reduce the impact of the declining revenues through the well-known iTunes store, but
the real saviour of the music industry was a Swedish company called Spotify. Spotify understood that
the general public would not pay huge sums of money for music as it was freely available on piracy
sites, so they decided to opt for a monthly subscription-based service that would give users access to
all songs on the platform.
The logical conclusion would be that the value chain of the industry would be simplified as everything
happens digitally, yet, this is not the case. There are too many intermediaries that take unnecessarily
high fees. This led to royalty problems as these unnecessary intermediaries would lower the amount
that audio content creators would receive. Not only were the payments unethically low, the timeliness
of these payments could take up to weeks, months if not years before artists would receive it. That is,
if these people ever received the money, as over $2.5 Billion dollars in royalty payments have not
been paid out due to unidentified copyright holders. There is a huge information disparity when it
comes to artists and music labels, as there are no transparent records of the revenue breakdown to
show why artists received a certain amount of money. If all of this is not enough, the music piracy
stats in Q4 of 2021 increased with 18.6% compared to Q4 of the prior year.
Blockchain technology and smart contracts have all the tools to solve the abovementioned problems
by decentralizing and democratizing the entire music industry. The solutions are all interlinked, as a
meta-database would bring transparency to reduce the information disparity between both parties. This
database in place would be transformed into smart contracts that automatically self-execute payments,
which would eliminate unnecessary intermediaries and provide timely payments to all parties
involved. By combining blockchain technology with digital watermarking, piracy can be combatted as
Custos tech managed to reduce piracy from 60% to 0.06%.
These solutions will help reshape the industry in the future, as the lack of a legal framework and the
current blockchain scalability problem prevent the widespread adoption within the industry.
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1 INTRODUCTION
The music industry had major transitions in the past five decades. Prior to digital sales, music albums
were sold on cassettes and vinyls. Eventually, this transferred to CD’s, and CD’s turned into digital
streams. This sounds good for the consumer, but the music industry suffered billions of dollars of
revenues in the process (Stone, n.d.).
The music industry has always been an interesting industry that captured my interest. To the general
public it seemed like a dream to work within this industry but in reality there were a lot of problems.
Since the upcoming of social media, more and more artists have spoken out about several problems
that they face within the industry. The suffered losses were extremely disadvantageous to audio
content creators but this was only the start of the problems.
The aim of this thesis is to find an answer for the following two questions:
• What are the main problems within the music industry?
• Does blockchain technology have the potential to solve these problems?
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2 STATE OF THE MUSIC INDUSTRY
2.1 Napster era
In the 90’s the economy and consequently the music industry seemed to have a positive outlook for
the future. But the outlook for the music industry completely changed at the end of that decade when a
massive disruption occurred that changed the music industry forever. What the music industry did not
know was that along with all the tech companies that were starting up, there was one tech start-up that
would shiver the entire industry. This was the start of the Napster-era.
2.1.1 Rise and fall of Napster
One might wonder how a small start-up lead to so many devastating consequences for the industry.
The story of Napster is truly fascinating as it changed the music industry forever and created a
pathway for the digitalization of music.
The start of Napster
In 1998, then eighteen-year old Shawn Fanning, who was a freshman at the Northeastern University,
created Napster. Napster was essentially a peer-to-peer (P2P) file sharing software service. Even
though there were lots of other file sharing services available on the internet, Napster stood out by
emphasizing on the distribution of MP3 files of audio. This phenomenon is also known as ‘music
piracy’, as copyrighted materials were shared.
(Honigsberg, 2002)
Co-founders Shawn Fanning and Sean Parker, whom is widely known due to his contribution to
Facebook, raised funding from Shawn’s uncle John, who became the largest shareholder in Napster.
Even though they found small investors through, they weren’t able to raise enough to continue their
operations on a healthy basis. Most venture capitalists refused to invest due to a pending lawsuit that
Napster received from the RIAA
1
. They were running a risky business and instead of changing their
business model into a viable idea where all parties would be pleased, they decided to continue their
pursuit for funding. Eventually, Hummer Winblad’s venture capital firm invested an amount of
thirteen million dollars for a twenty percent stake in Napster. Winblad put Hank Barry, a copyright
lawyer with sufficient experience in the industry, in charge as the CEO of Napster.
(Honigsberg, 2002)
1
RIAA: The Recording Industry Association of America® is the trade organization that supports and promotes
the creative and financial vitality of the major music companies. Source: https://www.riaa.com/
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Business and operating model
Back in the day, the application that Napster made was considered to be revolutionary, as it introduced
the world to a completely new way of listening to music. Napster’s business model was non-existent,
they weren’t making any money through their activities (Cartwright, 2000). This makes Napster even
more extraordinary, the music industry was shook by a start-up that had a zero-revenue business
model. Once Winblad’s investment came in, they tried to turn it into a subscription based model
(Bergmann, 2004). Sadly, this prototype was doomed to fail. The reasoning behind the failure will be
explained further in this report.
Napster had an impressive and innovative P2P architecture. The operating model was driven by people
looking for each other’s PC hard drives and transferring songs in that way. Napster decided not to
store songs on their own servers, but instead they opted to use central servers in order to provide a real
time directory. By providing this, they would specify names and locations of songs that were on the
PC’s of its users. All the files that were found and shared on the website, did not come from Napster,
but were uploaded by its users.
(Honigsberg, 2002)
Rise to the mainstream
Napster’s rise to the mainstream didn’t happen gradually, it happened at a rapid pace. It started from
several hundred Northeastern university students trading music with each other to reaching twenty
million users in its first year (Honigsberg, 2002). To give a better overview of how impressive this is,
a comparison of its first year user base is done with tech giant Facebook, also known as Meta
(Rodriguez, 2021). According to a report of the ‘WEF’, with collaborator ‘Statista’ (2019), Facebook
had 1 million users at the end of its first year (Richter, 2019). Napster had twenty times more users at
the end of its first year, during a time where the internet was less familiar to the general public than at
the start of the Facebook era.
According to Honigsberg (2002), at the peak of Napster, there were approximately 60 million people
that shared over a billion songs on the platform. The story of Napster seemed to good too be true and
as it usually goes, all good things must come to an end.
The inevitable downfall
With Hank Barry appointed as the CEO of Napster in May 2000, the restructure of Napster was about
to happen as they wanted to work along with major music labels by creating a viable business model.
With Napster’s activities being an infringement of copyright, it was soon clear that they would be
facing legal trouble. All five major labels filed a lawsuit against them, until major label BMG
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(Bertelsmann Music Group) decided to switch side and engage in a partnership with Napster. The
RIAA lawsuit, was already filed before the Winblad investment.
(Honigsberg, 2002)
Napster wanted to implement a subscription based service, according to their now deleted statement it
would work in the following way:
Napster’s model includes a "Basic Membership" plan that would cost in the range of $2.95 to
$4.95 per month with an as yet undermined limit on file transfers. The "Premium
Membership" will cost between $5.95 and $9.95 and will offer unlimited file transfers.
(Bergmann, 2004, p. 9)
Barry set up an business plan which showcased that with the subscription model, they would be able to
generate $500 million dollars in their first year, where an average of 70 to 80% would be distributed to
music labels. Sadly, the damage that Napster was creating for the industry was too big and the RIAA,
along with the 4 major labels, did not want to participate in that plan. The appellate court decision on
the 12th of February 2001, led to Napster blocking access to files that contained copyrighted songs.
Napster’s users found a way to cheat the software by misspelling the names of songs and artists, which
continued music piracy on the website. Napster then quickly optimized their software and blocked
99% of unauthorized files. In the meantime, Napster was developing a new protocol for a viable
subscription based model.
(Honigsberg, 2002)
The new protocol worked but due to difficulties with licenses, the firm announced that the company
and its assets would get acquired by the Bertelsmann group (Honigsberg, 2002). In order to facilitate
this deal, Napster had to file a chapter 11 bankruptcy (Collins, 2002). But according to Judge Walsh,
this deal was tainted as the current CEO of Napster, was a former Bertelsmann executive (Evangelista,
2002). This led to Napster filing for Chapter 7 bankruptcy and liquidating all of their remaining assets
to pay off creditors (Evangelista, 2002).
2.1.2 Long-lasting consequences after Napster
With Napster’s business being shutdown, the music industry seemed to continue its growing revenues.
But the shutdown of Napster was just the beginning of what was about to happen.
During the peak of Napster, the music industry didn’t face too much trouble when it came to music
record sales. In fact, they increased their revenues by 500 million dollars, with the Q1 figures for CD
sales in 2001 being 5.7% higher than the Q1 figures of the prior year (Honigsberg, 2002). What many
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people might have not realized was that Napster opened up a pathway for piracy and illegal audio file
sharing. Napster getting shutdown only meant that more and more music piracy websites would come
into existence. The effects of music piracy became more visible when the IFPI’s “2004 Commercial
Piracy Report” (2004) showcased that the global pirate music business had a market share of 15% of
the music market with a value of 4.5 billion dollars in 2003.
As Napster clones were quickly growing in 2002, it was necessary to find other ways to create a
sustainable future for music sales. The well known visionary, Steve Jobs, comes into play in this part.
Declining revenues and legal lawsuits against music piracy companies were not only taking too much
time but were at the same time hurting the industry’s brand image. Jobs came out with the idea to turn
digital music distribution into a legal framework by using a purchase based approach.
(El Gamal A., 2012)
At that time, Apple merely had a five percent market share of the PC market. For music labels, who
were sceptical of Jobs’ idea, this was a perfect way to experiment if his idea was viable or not. After
Warner and Universal agreed to jump aboard, it was a matter of time before other major music labels
would join. iTunes’ goal was to embrace the new wave of digitalization by offering music online,
which would make it more convenient for users to listen. No CD-players or Walkman’s were needed,
people could listen to music from their personal computers or through Apple’s portable iPod, which
lets users listen to music at any place and any time.
(El Gamal A., 2012)
The iTunes store was a great success, within its first week, they managed to sell over a million songs.
Their success expanded even further, once the iTunes store was made available for all PC users. But
the digital outlet store was estimated to have minimal profitability for Apple. Songs were sold at a
price of $0.99 and full length albums at a price of $9.99. Of each sold song, $0.65 would go to music
labels and at least $0.25 is estimated to go to other costs that were involved in the process. The
minimal profit or even negative figures were not a big issue for apple, as the iTunes store was a major
contributor to the success of the iPod. Due to that complementary relationship, they were eventually
able to make high profits. iTunes opened up a pathway to sell music online, but piracy was still rising
on a yearly basis. This wasn’t surprising to say the least, the major difference with Jobs’ invention was
that an additional (digital) store was created to sell music. The prices of music albums did not change,
and if consumers had the choice between listening to all albums and songs for free or paying for a
single or album, the choice is easily made. Nevertheless, iTunes was a major contributor in creating a
viable future for the music industry, their business model helped soften the downfall of the industry’s
revenues, but it didn’t turn the figures around.
(El Gamal A., 2012)
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The mainstream notice of music piracy was interesting for the consumer. Instead of paying a sum of
10 Dollars for a (digital) music album, they could instead pirate as many albums and songs as they
wanted for free. Even though revenues from CD sales and digital copies were still dominant in the
following years, thanks to music lovers that did not want to participate in the highly unethical practice
of music piracy, there weren’t enough people that saw these activities as unethical and as music piracy
increased, the music industry’s revenues kept plumbing down.
When looking at the revenues the music industry was generating, it is seen that the first shockwave
came when the music industry’s global music revenues went down from a total of 24.4 billion Dollars
in 2001, to a staggering 22.6 billion dollars in the following year (IFPI, 2020). A decline of 1.8 billion
Dollars was only the beginning, as the following chart shows.
The consequences were devastating. The effect that Napster had on the music industry was already
known, but the consequences were much larger than anyone had expected. The music industry’s
revenue kept brutally declining over the following decade, with the main reason for this decline being
music piracy.
(IFPI, 2020)
The abovementioned chart is divided in five different revenue sources, in order to simplify the used
terms, these revenue structures will be explained in simpler terms:
• The red bars represent physical copies that have been sold, prime examples are: CD’s,
cassettes, Vinyls.
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• The purple bars stand for performance rights, these are revenues retrieved from the right to
perform music in public, these can be venues, concerts & radio play (Thorne, 2015).
• The yellow bars are used for synchronization rights, this is a music license where the licenser
(holder of the copyright), gives a licensee the right to synchronize his music with visual media
(Leadsinger, Inc. v. BMG Music Publishing, 2008). Examples of visual media are: movies,
TV shows, video games, ...
• The light blue bars are downloads and other digital sales from online outlets such as iTunes.
• The dark blue bars are considered to be the holy grail of the music industry, namely streaming
services. Prime examples are: Spotify, Apple Music, Deezer, ... We will go more in-depth on
streaming services further in this report.
(IFPI, 2020)
When looking closely at the chart, certain positive elements can be found. Namely, the final revenue
of 2015. After 14 years of declining revenues in the music industry, a sudden rise of 3.2% in global
music revenues is seen during that year (IFPI, 2020). Consequently, as the revenues increased from
2014 onwards, a steep decline in physical copies occurred. Online music downloads are also seeing a
slow decrease, so how did the revenues suddenly go upwards? This was due to the introduction and
mainstream popularity of music streaming services (IFPI, 2020). Nowadays, a small minority buys
physical copies, nor do a lot of people pay money for individual albums or songs. Everything is tied to
music streaming now, in the following chapter we will research the market leader of streaming
services, their business model, and look into the reasoning behind their popularity and viability for the
future of the music industry.
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2.2 Digitalization changing the ecosystem of the music industry
2.2.1 Introduction of streaming services
Streaming services have revolutionized the music industry, the staggering decade-long decline of
revenues turned around when streaming services became more prominent. On the 18th of January
2022, the MIDIA research group published the market share of several streaming services in Q2 of
2021 (Mulligan, 2022).
Spotify is the market leader, as it covers 31% of the entire music streaming market. As expected,
Apple music proclaims the second place with 15% and Amazon music shockingly stands at the third
place. Whilst Amazon Music had a growth of over 50% compared to the Q2 figures of 2020, Spotify’s
market share decreased with 2% from the prior year.
(Mulligan, 2022)
The music streaming business is here to stay as it has seen an increase of 26.4% from the second
quarter of 2020. The global music revenue chart that was mentioned earlier clearly showcases that the
major source of income for the industry comes from Music Streaming Services (MMS). It is again
clear that Napster opened up a pathway for the business model of MSS, but it is crucial to identify the
differences between the latter and Napster. The focus is mainly set on Spotify’s operations throughout
this subchapter.
(Mulligan, 2022)
Figure 1: Market share of MSS. Source: https://www.midiaresearch.com/blog/music-subscriber-
market-shares-q2-2021
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Spotify’s rise to popularity
Spotify, the Swedish market leader in MSS launched its first version in 2008 (A. Rahimi & Park,
2020). Even though there was lot of uncertainty due to the financial crisis, they managed to grow out
to a userbase with over 180 million premium subscribers and the total MAUs
2
of 406 million in Q4 of
2021 (Spotify, 2022). Their growth is not only to thank to their key product offerings, which consists
of a variety of songs and artists, curated playlists, and podcasts (A. Rahimi & Park, 2020).
But they have differentiated themselves by adopting a strong social aspect by integrating social media
apps with their platform (A. Rahimi & Park, 2020). By connecting Facebook with Spotify, you’re able
to follow your friends on Spotify and see what type of music they’re listening to. Aside of that, dating
app Tinder has integrated Spotify into their platform. Tinder users are able to automatically showcase
their favourite music artists and favourite soundtrack on their profile.
Business model & revenue structure
In order for Spotify to offer a variety of music, they obtain licenses from music right holders (Gardner,
2017). Examples of right holders are artists, music labels, publishers and much more. This
distinguishes them from Napster’s initial business that ran from 1999-2002. Napster, after being
acquired and sold numerous times, has a similar business model now but unfortunately, they are not
almost not spoken of despite having more than 3 million subscribers on their service (Kopf, 2020).
Once these licenses are obtained, they will payout royalty fees to music labels/independent artists
based on the amount of streams their songs generate. Several parameters are used to calculate the
earnings per stream such as the currency value of the country where the song gets played, the
contracts, the value of the artists and much more.
(How Spotify Works, 2018)
.
2
Maus: Abbreviation for Monthly Active Users
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There are 2 main sources of income for Spotify:
• Premium service: This is a paid subscription model that lets its users play and download as
many songs as they want. In order to generate more sales with the younger public, they offer a
€4,99/month subscription to college students in Belgium. The price of their services
differentiate from country to country, a 2018 research from MBW showcases that the Spotify
premium price is closely tied to countries’ per-capita GDP (Peoples, 2018).
• Advertising revenue: Spotify offers a free music service that lets its users listen to music on its
platform. But there is a catch, users are not able to play music albums and songs in the order
that they prefer. Another catch is that every 30 minutes, songs will be stopped and an audio
advertisement will be played. By offering audio and banner advertisement incentives to
companies, Spotify is able to make money through their free music service.
(Gupta, 2021)
An important aspect to consider is how viable and sustainable the future of Spotify is. When looking at
their financial statements, it can be determined that Spotify has yet to be profitable on an annual basis
(Spotify Technology S.A., 2022). Q4 of 2018, was the first time Spotify managed to report a quarterly
profit (Spotify , 2019). This was huge news for Spotify and its shareholders, they released this
statement on their website:
Figure 2:Spotify Premium price vs per-capita GDP. Source:
https://www.musicbusinessworldwide.com/spotify-doesnt-cost-9-99-everywhere-and-thats-
absolutely-fine/
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“Results for Q4 2018 outperformed our expectations and, for the first time in company
history, Operating Income, Net Income, and Free Cash Flow were all positive
(Spotify , 2019, p. 1).”
From a personal point of view, it seems quite obvious why they weren’t making profit. Spotify was
not concerned with making quick profits, but rather interested in utilizing a growth model. They
wanted to have a steady growth and become the market leader in the MSS segment. So how are they
still able to operate despite making losses? The answer lays in funding, Spotify has had 18 funding
rounds and acquired a total of $2.1 billion in capital (Spotify Funding, 2020). In order to maintain their
position as the market leader, huge costs are made through the continuous innovation and
improvements of their services.
But in retrospect, the company’s revenues are increasing significantly, with their revenues in 2021 up
by 27.21% compared to the prior year. Not only that, they are slowly becoming a profitable company,
as their 2021 net losses have decreased with 93.93% compared to the prior year. In 2020 the company
made a loss of $662 million, whilst in 2021 it was only a ‘merely’ $40 million.
(Spotify Technology S.A., 2022)
There is a simple explanation for the success of MSS, they are cheap, convenient and have a diverse
offering of musicians and songs. They have simplified the process of bringing music to the general
public, as it is much more convenient for independent artists to grow in a competitive industry without
the heavy funding that was required in the pre-internet era.
Comparative analysis
In order to see how different MSS differ from each other, a comparative analysis is conducted to find
the key differences. The following figure gives a clear overview of the different MSS through the eyes
of a medium sized independent music label.
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The following figure shows the average payout of several MSS, and the label’s market share of
streams and income coming from these MSS. For the sake of understanding, this will be explained in
simpler terms:
51% of the independent music label’s songs are streamed through YouTube Content ID, but
these streams only make up 6.42% of the total revenue generated by the music label. Spotify
generates 22.09% of the label’s total streams, but that amount of streams makes up for
44.33% of their total revenue. This is due to Spotify’s average pay-per-stream being
approximately 16 times higher than YouTube Content ID.
Even though Spotify accounts for the label’s highest source of income, Apple music provides the best
value per stream as it provides 24.79% of the label’s revenues with only 6.36% coming from the
platform. Their average payout is almost twice as high as Spotify.
(2019-2020 Streaming Price Bible, 2020)
Figure 3: Streaming pay out and market share of MSS for an independent music label. Source:
https://thetrichordist.com/category/royalty-rates-2/
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2.2.2 Value chain of the music industry
As the music industry had no other choice then to embrace the ongoing wave of digitalization, this led
to changes in the value chain. Logically, the value chain should be much more simplified compared to
the pre-internet era, as everything happens online. In order to see if that statement is true, a
comparison between both value chains must be done.
Figure 5: Value chain of the music industry during the internet era. Source: Disintermediation in the Recorded Music
Supply Chain by Hosoi, Kim, Stainken & Caro (2015)
Figure 4: Pre-internet value chain of the music industry Source: Disintermediation in the Recorded
Music Supply Chain by Hosoi, Kim, Stainken & Caro (2015)
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The value chain prior to the internet era doesn’t resemble any change in the creation of songs and the
collection of revenues. Ways of delivering to the end consumer changed due to the aggregator. The
aggregator enabled artists to make use of a digital supply chain. This means that artists are able to
make money of their music without selling physical copies. Due to the significant decrease in
operating costs, anyone can make music and publish it on the internet. The aggregator, which are
digital distribution companies in this case, have simplified the supply chain for smaller and
independent artists, as the following chart shows.
(Sitonio & Nucciarelli, 2018)
The value chain for smaller and independent artists got simplified, but the abovementioned figures
show that the current value chain for signed artists is not simplified, in fact it is even more complex.
There is a lot of criticism when it comes to the current value chain. The total and flow of payment for
major artists has decreased due to the revenue stream that Aggregators have created (Sitonio &
Nucciarelli, 2018). Independent artists have an efficient mechanism to publish music on the internet,
but they have been facing severe issues with the payment of their royalties (Sydell & Selyukh, 2015).
Unfortunately, this is just a fraction of the problems that musicians face within the industry.
Figure 6: Value chain of the music industry for smaller/independent artists during the internet era.
Source: Disintermediation in the Recorded Music Supply Chain by Hosoi, Kim, Stainken & Caro
(2015)
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2.3 Problems within the music industry
There are several problems within the industry that leave a negative effect on musicians. The industry
has been an oligopoly for a very long time, with currently only 3 major labels ruling the industry.
These 3 labels combined had a music revenue market share of 68.5% in 2020, whilst their publishing
departments simultaneously held a revenue market share of 58.7% in the publishing segment.
(UMG and SME , 2021)
The three major labels in the industry are:
• Universal Music Group
• Sony Music Group
• Warner Music Group
(McIntyre, 2021)
2.3.1 Royalty issues
This has been one of the most outspoken issues in the music industry, artists are not happy with the
current royalty distribution mechanism that is in place. Music royalties are defined as payments that
are paid to the right holders of a certain copyright in order to get a licensed use of that copyright,
which in this case is music (How Music Royalties Work, 2020).
The first problem arises from the amount paid in royalty fees to artists (Kessels & Avid, "Beyond the
Hype of Blockchain – A Scenario-Based Analysis of the Potential Applications in the Music
Industry.", 2019). If we compare the paid out amount with the pre-internet and even pre-MSS era, we
can determine that the payout is much lower. This can be shown with the some of the figures we used
in this document. Earlier in this report, we discussed how the iTunes model worked, individual songs
would be sold at a fee of $0.99 (El Gamal A., 2012). Then later in the report we saw that Spotify’s
payout per stream averaged to $0.00348 (2019-2020 Streaming Price Bible, 2020). Here is a simple
example:
If a song gets 100,000 streams, this means that the total revenue for that song would be $348.
If a song gets 100,000 sales on iTunes, the total revenue would be $99.000. In order to make
this comparison more realistic, let’s assume that out of those 100,000 streams, there were
40,000 unique listeners
3
. This would mean that the iTunes sales would be $39.600, making the
revenues obtained from streaming services approximately 114 times lower than selling it on a
digital outlet store.
3
Unique listeners are the amount of people that played a song. A song with 100,000 streams does not have
100,000 unique listeners, as listeners stream the same song multiple times.
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This problem became mainstream when the rumour came out that Lady Gaga received a merely $167
for her song ‘Pokerface’, which was streamed a million times (ChrisQ, 2010). So who is really to
blame for this? Aside of streaming services, major labels have a huge role in this issue. The payments
that they receive from MSS, are in place distributed to artists based on their contracts. It is no secret
that major labels have been offering bad contracts to artists due to their powerful position (Blistein &
Shannon, 2021).
The second issue arises from the timeliness of these royalty payments, music labels take a lot of time
before giving out these royalties to their artists (Kessels & Avid, "Beyond the Hype of Blockchain – A
Scenario-Based Analysis of the Potential Applications in the Music Industry.", 2019). The reasoning
behind this is that there are too many intermediaries. There is lots of administrative work tied to this,
as every intermediary has their own database and payment system (Gough, 2018). These transactions
only happen once they go through every independent system, and as the databases, that are developed
by music labels, have inaccuracies, payments take a long time to arrive (Gough, 2018). This happens
at the expense of everyone included in the creative process.
2.3.2 Copyright issues
Like the royalty issues, the copyright issues will also be divided in to two different problem sets. The
general definition of a music copyright according to Pastukhov (2020) is the following:
“Music copyright designates legal ownership of a musical composition or sound recording.
This ownership includes exclusive rights to redistribute and reproduce the work, as well as
licensing rights that enable the copyright holder to earn royalties.” (Pastukhov, 2020, p. 2)
Problem 1: Piracy
Some concerning facts started to arise in February 2022, according to MUSO’s
4
newest research,
music-piracy related visits started to increase again in 2021. The total yearly increase was 2.18% with
Q4 of 2021 having an increase of 18.6% compared to Q4 of the prior year. The chart mentioned on the
following page, shows the sudden increase in music-piracy related sites.
(Stassen, 2022)
4
MUSO is a technology company providing anti-piracy, market analytics and audience connection solutions that
disrupt the piracy market for digital content. (About us, n.d.)
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The two main destinations of music piracy related visits
came from ‘Stream Rippers’ and unlicensed streaming
websites (Stassen, 2022). The latter one is self-
explanatory, but stream rippers, also known as
‘destreaming’, are websites that rip music from
streaming platforms. How this works is that they rip
music from streaming services using a distinct software
that saves streamed songs into a file on the “ripper’s”
PC. This file gets converted into a downloadable file,
which users can use offline.
(What is Stream Ripping/Destreaming?, 2021)
Problem 2: Synchronisation with official databases
The second problem to be discussed is the one where the synchronisation of copyrights with official
databases can lead to problems (Kessels & Avid, "Beyond the Hype of Blockchain – A Scenario-
Based Analysis of the Potential Applications in the Music Industry.", 2019). IP rights can get
transferred from one individual or entity to another, the issue with this process is that this transfer
sometimes happens without updating the register (Kessels & Avid, "Beyond the Hype of Blockchain –
A Scenario-Based Analysis of the Potential Applications in the Music Industry.", 2019). Which means
that after the transfer of a copyright from person A to person B, the owner of that copyright might still
be person A.
This can have devastating consequences for artists as more than 46 million cases of unidentified
songwriters/copyright owners were digitally filed by streaming services with the US Copyright Office,
Figure 7: Music piracy related visits. Source: MUSO
Figure 8: Destinations of music piracy related visits. Source:
MUSO
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it is estimated that $2.5 billion in royalties still needs to be paid out to these unidentified right holders
(Resnikoff, 2017).
According to Kessels & Avid (2019), Solo (2014) calling a necessary and clear framework for a
healthy industry, is much more complex and sophisticated. The industry needs a better copyright law
that will help maintain a system that promotes creativity and rewards creatives for the creation of
content (Kessels & Avid, "Beyond the Hype of Blockchain – A Scenario-Based Analysis of the
Potential Applications in the Music Industry.", 2019).
2.3.3 Transparency issues
There is an extreme information asymmetry in place between record labels and musicians, with music
labels withholding valuable information from their artists. There are several prominent musicians that
have spoken up against this transparency issue. During an interview with Rolling Stone (2014) the
lead singer of the infamous group U2, Bono, argued that artists don’t know where the revenues that
Spotify allocates to copyright holders are, due to the lack of transparency of music labels. There are
numerous cases where the music industry was involved in deceit. Bono (2014), made the following
statement:
But if we change that a bit, and people can actually see how many times [songs are] being
played, where they're being played, get access to information on the people who are listening
to them, get paid direct debit.... I think those payments will add up to something, as the world
gets more transparent. (Bono, 2014, p. 3)
Nowadays artists are literally being exploited by transparency issues. A report from Citigroup (2018)
reported that musicians captured not more than 12% of total artist revenues, which is still more than
the proportion in the year 2000, where artists’ total revenue share was merely 7%. Most artists have no
idea about the exact costs of the entire process of making music. Without knowing these costs, they
are also not able to determine whether the amount money they are making is accurate or not.
A good example of artists suffering from this problem, is Dutch rapper Kid de Blits whom signed a
deal at TopNotch, the most famous hip hop music label in the Netherlands. Blits had the following to
say during his video interview (2021): (translated from Dutch to English)
I have never earned a penny from my music during my time at TopNotch, when my
management called them, they said that I haven’t paid my advance off yet, which means that
I’m still paying off my debt. I don’t even know how this is possible, I know how they work over
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there, letting interns do a lot of the work, I don’t know the amount of costs that I made. (Blits,
2021)
Blits implies that TopNotch let a lot of the work for his album rollout done by interns and charge him
high costs for it, so that he remains in debt. Blits (2021) started off this part of the interview by
emphasizing on how music labels trick young musicians into signing their music away. Once you sign
a record deal, an artist’s music is technically not his, but is owned by the music label.
Musicians usually get paid an advance when they sign, after the advance is paid off, musicians
typically earn 10-20% of the revenue their music generates. This is a very low percentage, but the
amount of money they get for those percentages would probably be much higher if there was more
transparency from the label’s side. This issue has led to artists wanting more and more transparency in
the management of their rights (A. Carretta, 2020).Whenever artists do get payment information, this
is usually presented in such a disjointed, incomplete, and inaccurate way for intermediaries, artists and
digital services as there is a lack of standardized royalty statements (A. Carretta, 2020). As more and
more artists are becoming aware of this injustice, a clear and embedded framework is needed to solve
this issue. That’s where blockchain technology comes into play.
3 EMERGING TECHNOLOGIES
On the 17th of May 2015, George Howard (2015), wrote an article on Forbes with the following
headline: “The Bitcoin Blockchain Just Might Save The Music Industry...If Only We Could
Understand It”. This was one of the early articles on the potential incorporation of blockchain
technology within the music industry. The headline ends with “If only we could understand it”, and
Howard is completely right. The general public has little to no knowledge about blockchain, but it is
even more shocking to find out that according to a survey done by Cardify, more than 33% of
cryptocurrency investors have zero knowledge about blockchain technology (All Aboard The Crypto
Train: Who Are The Latest Crypto Investors?, 2021). Therefore, the following subchapters will
provide a both technical and theoretical explanation on this technology whilst maintaining a user-
friendly reading experience.
3.1 Blockchain technology
History of Blockchain
On the 31st of October, 2009, an anonymous person or group named Satoshi Nakamoto published a
white paper called “Bitcoin: a Peer-To-Peer Electronic Cash System” (Nakamoto, 2009). This paper
would be the start of the first decentralized blockchain. The paper went in-depth about an electronic
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cash system that allows transactions without the necessity of a middleman (Nakamoto, 2009). To give
a simple example:
“Person A living in Belgium wants to send money to person B living in India. The current
financial system allows this transaction to happen through a middleman, which are usually
financial institutions such as banks. The Bitcoin white paper proposes a solution where person
A can directly send the money to person B without an intermediary in the middle."
The transaction between these 2 people would happen through a cryptocurrency called Bitcoin
(Nakamoto, 2009), which has grown in popularity in recent years. But what exactly are
cryptocurrencies and blockchain?
The word blockchain was never mentioned in the white paper, but the 2 words ‘block’ and ‘chain’
kept recurring dozens of times within the document. All cryptocurrencies, like Bitcoin, run on the
blockchain. The name cryptocurrency was derived from the fact that these alternative currencies use
cryptography to validate transactions that happened within the network (Frankenfield, 2022).
Blockchain enables people to transfer items in a secure way without a third-party intermediary. A
blockchain is a digitally distributed ledger that contains blocks filled with information, such as
information about a transaction between to people (Frankenfield, 2022). These blocks have a
maximum storage capacity and once they reach that maximum capacity, the block gets closed and
chained to the previously filled block which forms a chain of data and information (Hayes, 2022).
Hence the name blockchain technology. Cryptocurrencies are alternative currencies that facilitate
these transactions between 2 people.
Even though Satoshi Nakamoto provided the first working protocol of blockchain, the history of it
goes all the way back to 1982. In this year, Dr David Chaum published his dissertation in order to
complete his PhD in Computer Science. The title of the dissertation was ‘Computer Systems
Established, Maintained, and Trusted by Mutually Suspicious Groups’ (Chaum, 1982). The reasoning
behind the importance of this paper is derived from the fact that Dr Chaum’s research provided the
first conceptual protocol for blockchain technology. The Bitcoin whitepaper includes all the main
elements of Dr Chaum’s protocol, but there is one more important element added in the white paper.
Namely, the ‘Proof of Work’ (Bonneau, 2018).
The proof of work idea was invented by computer scientists Cynthia Dwork and Moni Naor (Cook,
2018), but it was the adapted version of their idea that was mentioned in the Bitcoin white paper. This
adapted version was made by another computer scientist who goes by the name of Hal Finney, who
was the recipient of the first bitcoin transaction (Crosby, Nachlappan, Pattanayak, Verma, &
Kalyanaraman, 2015). The most important element in the PoW framework are the miners. These are
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people that own computers within the network and solve extremely complex mathematical problems
in order to add blocks to the chain (Frankenfield, 2022). These miners get high rewards as mining is
extremely expensive due to the cost of setting up computers and the electricity cost that comes with it
(Frankenfield, 2022). The technical and more in-depth side of proof of work will be explained further
in this document.
Blockchain: The biggest invention of the 21st century?
In recent years, more and more experts have spoken out in a positive manner against blockchain
technology and Bitcoin, whilst a fair share of people had their criticism about it. But what makes this
technology so revolutionary? The following points showcase the features that set the technology
surrounding blockchain apart from other technologies:
• Decentralized: The decentralisation of blockchain allows the technology to work without any
intermediaries or central administrators. Due to the proof of validity and authorization, the
transactions on the blockchain are verified and processed on there own, without any third-
person involved (Strebko & Romanovs, 2018).
• Transparency: All actions performed on the blockchain are recorded and are open for the
public to see. The data on the blockchain remains transparent due to the impossibility to
change nor delete this data (Strebko & Romanovs, 2018).
• Immutability: As blockchain doesn’t have centralized middlemen, it uses a collection of
nodes, which are small servers. If the majority of nodes think the transaction is valid, they will
add it to the ledger. Immutability essentially means that the technology cannot be changed nor
altered by anyone due to the high layer of protection (Iredale, 2021).
• Consensus: This is an algorithm that makes decisions for a group of nodes to make faster
agreements. Certain transactions need a lot of nodes to validate it, so an efficient system is
necessary. The consensus algorithm is essential as the core value of blockchain,
decentralization, would be lost without the algorithm (Iredale, 2021).
These features are big advantages that make blockchain technology an important tool, but it comes
with a small share of challenges and disadvantages, such as:
• Environmentally damaging
Lots of power and electricity is needed to keep real-time ledgers. Transparency is one of the main
advantages of blockchain, which gets enabled by nodes communicating with each other (Strebko &
Romanovs, 2018). Miners solve extremely complex problems, but these problems require a very high
amount of electricity (Strebko & Romanovs, 2018). Michael Saylor, the CEO of the Bitcoin Mining
Council came with hopeful news in April 2022, where they provided data that an estimated 58,5% of
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the power used to mine Bitcoin, came from a sustainable energy mix, which brings hope for a green
future for cryptocurrencies (BMC, 2022).
• Scalability
Scalability is considered to be one of the biggest problems within blockchain as it hurts real-life
adoption of blockchain in industries (Crypto.com, 2020). It determines the network’s capacity, which
includes several elements such as
➢ Number of nodes in the network
➢ Number of transactions that can be processes
➢ How fast the network can process these transactions.
(Crypto.com, 2020)
Scalability is expressed in 3 different concepts, namely: throughput, finality and confirmation time.
For the sake of simplicity, let us take the example of a bus journey:
“ A bus arrived every 10 minutes at your station. It takes you 60 minutes to get home, but as
it’s a fairly popular bus route, the bus was full when it arrived to your station, so you decide
to take the next one. The capacity of the bus is 7 people per minute”
(Crypto.com, 2020)
In this example, the throughput is the capacity of the bus. The throughput in blockchain is the amount
of transactions that can be handled per second. The time to travel home, which is 60 minutes, is
defined as finality. Finality in blockchain is guaranteeing that transactions, once completed, cannot be
changed or cancelled (Ifegwu, n.d.). It is the time one has to wait to guarantee that everything went
smoothly. The last one is the confirmation time, which is the total travel time that with the bus (10
minutes waiting time + 60 minutes travel time). The confirmation time is as essential as the other 2
elements. Having 1 million transactions per second can be excellent, but if it takes 10 days to confirm
these transactions, it will harm the adoption of blockchain in real industries.
(Crypto.com, 2020)
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The picture down below shows a comparison of the transactions per second of major cryptocurrencies
together with well known payment companies VISA and PayPal.
(Crypto.com, 2020)
How does it work?
Up an till this point, a theoretical explanation was provided in regards to cryptocurrencies and
blockchain technology and the proof of work mechanism. Therefore, it is important to understand the
technical process that goes behind these sophisticated technologies.
• Transaction process in the blockchain
For simplicity reasons, the transaction process will be explained in 5 simple technical steps that make
the process understandable to all individuals reading this document. The picture below showcases the
5 important steps that a transaction has to go through.
Figure 9: Transaction speed of cryptocurrencies compared to VISA and
PayPal - https://crypto.com/university/blockchain-scalability
Figure 10: Blockchain process steps - Retrieved from https://www.msg-global.com/blog-item/blockchain-
moving-beyond-bitcoin
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The first step starts with an individual who tries to request a transaction in the Peer-to-Peer network
(P2P). P2P is essentially two or more computer systems that are connected and can share resources
without the need of a separate server (Indeed Editorial Team, 2021). Once the transaction is requested
it gets broadcasted to the P2P network to all the nodes within the network. This step is defined as the
‘Communication’ step.
(Kommana, 2017)
The nodes will solve mathematical problems in order to validate the transactions. This is done by the
Proof-of-Work protocol, which will be explained on its own. Once this transaction is verified, a new
block filled with other transactions will be created in the blockchain. Finally, the block will be added
to the existing chain of blocks and the process is completed.
(Kommana, 2017)
• Proof-of-Work mechanism
As previously explained, miners try to solve complex mathematical formulas in order to validate
transactions. The block time is 10 minutes, which means that every 10 minutes a new block of
transactions is added to the network (Annison, 2021). The winning miner gets a block reward, which
at the time of writing is 12.5 BTC + transaction fees within the block (Ledger, 2019). The
abovementioned picture showcases a simplified version of the process.
The network server sends the complex puzzle to the miners, who try to solve it as soon as possible.
Once completed, they get sent back to the network server, which verifies the correct answer. Finally,
once correctly verified, the winning miner gets the block reward.
(Ledger, 2019)
Potential real-life applications
Blockchain technology was originally created to facilitate payments between 2 individuals without a
central authority in between them. In recent years, more and more people have seen the opportunities
this technology can create in different fields and industries. Up and till this point, we have only
Figure 11: Proof-of-Work process - https://www.ledger.com/academy/blockchain/what-is-proof-of-
work
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covered the decentralized payment protocol that is enabled through blockchain, but there is much
more to this technology than only that. Therefore, a small analysis will be done to see how blockchain
can empower non-financial industries:
• Healthcare
Blockchain can revolutionize the healthcare industry in several ways. One of the most known ways is
through the ledger technology. This enables healthcare researchers to transfer medical records of
patients in a secure way. Aside of that, the digital frameworks built on blockchain ensure that there
won’t be uncontrolled adjustments when it comes to the data of logistics. Some people might argue
that the blockchain is a public ledger, which enables people to know sensitive medical data of patients.
But even though the blockchain is public, it is also private as the identity of patients will be hidden
behind sophisticated and secure algorithms that preserve this kind of information.
(Haleem, Javaid, Pratap Singh, Suman, & Rab, 2021)
• Agriculture
Blockchain can empower lots of fields within the agriculture sector. Food security is a well known
example, this means that people have access to safe and nutritious food at any time to manage a
healthy and viable lifestyle. We know that this is not the case for a large portion of people in third-
world countries. Therefore, blockchain can help with the transparent delivery of international aid to
these countries. A well known example is the digital food coupon project, which helps over 100,000
Palestinian refugees. This was done through an Ethereum-based blockchain where the coupons were
redeemed via the usage of biometric data.
(Kamilaris, Cole, & X. Prenafeta-Boldù, 2021)
• Travel
Globalization has enabled people to travel more and be open-minded to get to know different and
unknown cultures. Since the 1980s, world air passenger traffic has increased significantly, as can be
seen on the char belowt. Due to the COVID-19 pandemic and lockdowns, this figure decreased
Figure 12: International Civil Aviation Organization (2020). ICAO Economic
Impact Analysis of COVID-19 on Civil Aviation. - https://www.iea.org/data-and-
statistics/charts/world-air-passenger-traffic-evolution-1980-2020
Figure 13: Global air travel figures
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heavily in 2020 but is making a steady return from 2021 onwards. Blockchain can help the booking
system through smart contracts, which in place verify details of travellers with their national identity
(Bhagwani & Govindaraj, 2020). Fraud rates will be lowered by giving partial access to a common
database to travel booking websites and registered brokers (Bhagwani & Govindaraj, 2020). But what
exactly are smart contracts?
3.2 Smart contracts
Introduction to Smart Contracts
The term smart contracts was first identified in 1990, by computer scientist Nick Szabo. According to
Szabo, it is a computerized transaction protocol that executes terms of a contract (Szabo, 1994). The
benefits that would be derived from this protocol are a reduction in fraud loss, arbitration and
transaction costs (Szabo, 1994). The reasoning behind the word smart was that these contracts were
digital and “smarter’ than normal contracts as they could automatically execute pre-determined steps
(D. Levi & B. Lipton, 2018). Let’s elaborate this with a very simple example:
“Two businessmen have a contractual agreement and have agreed upon a fine for whom
breaches the contract. If person A breaches the contract, this fee will automatically be
deducted from him as stated in the smart contract.”
What we can derive from this example is that the goal of a smart contract is to make business and/or
trade between two parties without the need of a middleman. The smart contract keeps the authenticity
and credibility of a general paper contract but scales down on formality and costs that the traditional
method brings.
(G. Kukkuru, 2021)
The term “Smart Contract” rose to popularity when it was mentioned in the 2014 whitepaper for the
cryptocurrency Ethereum, which was published by then 19 year old Vitalik Buterin. In the document,
Vitalik argues that Bitcoin facilitates a weak concept of smart contracts and that with Ethereum, he
plans to provide a blockchain that can be used to create contracts. Due to the programming language,
anyone is able to write a smart contract or decentralized application to create their own rules for
ownership and transaction formats.
(Buterin, 2014)
Advantages & Disadvantages
Smart contracts are an important and innovative solution to solve problems in different fields, some
advantages are:
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• Transparency
As the contract terms are virtually visible to different network players of the blockchain, it is
extremely difficult to modify it. All the transactions are monitored and controlled by various nodes in
the network, which helps reduce the risk of fraud.
(Nzuva, 2019)
• Speed and efficiency
There are no third parties involved in a smart contract, which means that once an event is triggered,
the contract executes itself. An example of a trigger might be a specific date or an activity such as the
delivery of a service. The benefits derived from this are that the verification of the amount of payment
and whether the right service is delivered for that payment happens automatically. Along with smart
contracts, the proof of work comes into play here, where all the nodes validate the transaction before it
gets executed.
(Nzuva, 2019)
• Security
According to tech giant IBM, smart contracts that run on blockchain technology are extremely safe
due to the encryption. This prevents the likelihood of hacks and as all records are connected to
previous and future records on a distributed ledger, hackers should have to hack the entire chain to
change 1 record.
(IBM, n.d.)
Like most things in life, everything comes with its pro’s and cons. Smart contracts are no different to
this and even they come with the following limitations:
• Readability
This is one of the creation challenges that smart contracts face. Creation is the first step of a smart
contract’s life cycle, which will be explained further in this document. Readability emphasises on the
fact that most smart contracts are written in programming languages. Common languages are Java, Go
and Solidity and once written, source codes will be compiled and executed.
(Zheng, et al., 2019)
• Cost
Whilst it is commonly known that smart contracts are cost-effective, it can be that congestion in a
blockchain network delays a transaction which can increase the transactional costs to a level that it is
more expensive than regular contracts (Malik, 2021). Congestion is the process where demand for
blockchain transactions is higher than the blockchain capacity (Solokov, 2021).
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Life-cycle
The life-cycle of smart contracts consists of 4 phases, which are; creation, deployment, execution and
completion, as the picture below showcases.
1) Creation: All the involved parties negotiate on the terms and conditions of a contract until
an agreement is reached. Afterwards, software engineers will convert the agreement into a
smart contract using computer languages (Zheng, et al., 2019).
2) Deployment: After the validation, the smart contracts are deployed to platforms on top of
blockchains. From this point onwards, they cannot be modified anymore and are
accessible to all parties through the blockchain (Zheng, et al., 2019).
3) Execution: Once deployed, the contractual clauses are monitored. When a certain
contractual condition is reached, the corresponding statement will automatically be
executed (Zheng, et al., 2019). This is the self-execution process that was mentioned
previously in this document.
4) Completion: Now that the execution is done, the state of all parties involved is updated
and stored in the blockchain (Zheng, et al., 2019).
Figure 14: 4 phases of the smart contract life cycle - https://arxiv.org/pdf/1912.10370.pdf
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4 MERGING BLOCKCHAIN, SMART CONTRACTS AND THE MUSIC
INDUSTRY
In the previous chapter we have proven that this technology does not only empower the financial
industry but also several other industries. The music industry can benefit greatly from blockchain and
in the following subchapters, an explanation will be provided on how effective this technology is in
solving the previously mentioned problems within the music industry.
4.1 How blockchain technology and smart contracts can solve problems
within the industry
In subchapter 2.3, some essential problem sets were provided, these consisted of; royalty issues,
transparency issues and copyright issues. The solutions provided for these problems are all interlinked
and will help artists to get more power within the industry.
Transparency problem
One of the main reasons for the imbalanced power structure within the music industry is thanks to the
information disparity between audio content creators and music labels. We already talked about the
lack of data traceability for artists in the second chapter. Luckily, there is a solution for this issue,
namely, meta-databases. Meta-databases allow details of a certain audio file to be registered on the
blockchain (Kessels & Avid, 2019). This in place, creates transparency as you can see all the right
holders of a certain song on the blockchain. Lots of different things can be listed on the network, such
as information surrounding the artists and lyrics (Kessels & Avid, 2019). Immutability was listed as
one of the benefits of blockchain in this document and because of that element, everyone is able to see
the owners of a particular song.
These contracts can contain exact percentual figures that each right holder should receive when a song
is bought/streamed. This will reduce the information disparity between music labels and all other
parties as everyone will be able to see this information. The issue lays in the willingness of music
labels to provide all the information and data they collect surrounding an artist and their work.
(Kessels & Avid, 2019)
Royalty problem
The first problem set that was defined in this paper was the issue of royalty payments. Royalty
payments are payments to the right holders of songs, which are songwriters, music producers, singers
and everyone else involved in the creative process. Two main problems were identified with royalties,
namely, the low payments artists get compared to the revenues they bring in from streaming services.
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This was due to the value chain, which included an excess amount of intermediaries. The second
problem came from the timeliness of these payments.
This solution for this problem builds on the solution for the first problem. A crucial element to solve
this issue is the meta-database. The way this helps our royalty problem is that the creation of this
meta-database makes everything about a song traceable (Kessels & Avid, 2019). The figure of the
current value chain for a signed artist in chapter 2.2, showcases that there are lot of people involved in
this process. All the information on these databases will be turned into smart contracts, which enables
an extremely transparent payment system as all shares of people involved in this creative process are
listed on the smart contract (Kessels & Avid, 2019). Because everyone’s share is included, it makes
room for an efficient and automated royalty payment system. As mentioned before, smart contracts
automatically self-execute themselves when certain triggers are reached, which means that no
intermediaries are needed to facilitate these payments (Kessels & Avid, 2019). As the timeliness
problem gets solved with smart contracts, it eliminates further need for artists to hire attorneys to fight
cases of late payments, which saves artists a lot of money (Taghdiri, 2019). Due to the low operating
costs of smart contracts, micro-transactions can be enabled. How micro-transactions will work are that
once a song is purchases or streamed, the obtained revenue will automatically be distributed to all the
involved parties without the need of intermediaries (Kessels & Avid, 2019).
Copyright problem
Copyright protection is essential in any creative industry and Napster has shown the music industry
that piracy can have devastating consequences. There are lots of ways to protect copyright, such as
header data, hashes or acoustic fingerprints. Another proposition is encryption, which is secure, but
would need a decryption software in order to access the contents. Yet, according to Rosenblatt (2018),
there is one way that creates and ideal combination between the following 4 elements:
• Data flexibility:
The data of an audio file can exist in more than 1 files with different identifiers. An identifier
identifies data of an audio file. An example is the International Standard Name Identifier, better
known as the ISNI. The ISNI identifies creators of songs. Just like the ISNI; there are more identifiers
that all have different functions.
(Rosenblatt, 2018)
• Security:
The identifier is protected and is almost impossible to change or delete without altering the audio file
(Rosenblatt, 2018).
• Identifier Reliability:
The audio file is correctly identified by the identifier in order to track copyright holders and to pay out
royalties (Rosenblatt, 2018).
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• Robustness:
If a transformation happens within the file, such as a change in sampling or pitching, the identifier will
continue to identify the data that is correlated with this audio file (Rosenblatt, 2018).
The solution he proposes is combining blockchain with a concept called digital watermarking which
takes all the abovementioned criteria’s into consideration as shown on the table below.
Rosenblatt defines digital watermarking in the following way:
“A digital audio watermark is a set of data embedded directly into audio in such a way as to be
imperceptible to listeners.” (Rosenblatt, 2018, p. 14)
He argues that metadata, which is found in the meta-database, can be put into an audio file which will
automatically detect piracy and copyright infringement. It takes all the elements of header metadata,
hashes and acoustic fingerprints to create the optimal solution to enable a fast detection of watermarks.
There are several companies working on music blockchain projects where all the transaction data is
stored within the blockchain, but the music itself is not. Therefore, a link between the two must be
created by putting an identifier in the transaction data that matches the identifier in the audio file.
(Rosenblatt, 2018)
Another proposition is encryption, which is secure, but would need a decryption software in order to
access the contents (Rosenblatt, 2018). This impedes the use of music, whilst watermarking can
provide the same level of security with a higher level of efficiency (Rosenblatt, 2018). Kessels & Avid
(2019) explain that the watermark is hard to remove even if a file is resized or downscaled, which
increases the traceability of music on the blockchain and enables an artist to prove he is the rightful
owner of that audio file.
The second problem was that the synchronization of copyrights led to issues where copyright transfers
were not tracked and updated in these databases. This led to the black box problem, where over 2.5
Billion Dollars of royalties were not paid out due to unidentified copyright holders (Resnikoff, 2017).
The meta-database provides a way to create smart contracts with the names of all the copyright holders
which solves the unidentified right holders problem (Rosenblatt, 2018). As stated before, all 3 major
problems are interlinked and enable solutions for each other. The meta-database provided transparency
so that the unidentified copyright holders can be identified whilst the smart contract makes sure they
automatically get paid for their contribution instead of centralising it to a third party (Rosenblatt,
2018).
Figure 15: Comparison of the methods to solve the copyright problem -
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Practicality
It is important to understand that up and till this point, this paper has given theoretical applications that
help resolve issues within the music industry, but the practicality of it depends on a lot of other factors.
• The meta-database
The meta-database would put all stakeholders on the same level, as everyone has the same knowledge
and information about a certain artist or song. This would shift the power structure within the industry,
which would decrease the power of music labels. This scenario would make music labels reluctant to
work with such a database. If the meta-database does get adopted, scalability might be a strong issue
as blockchain technology hasn’t reached its maturity stage yet. A meta-database in this situation,
should process a considerable amount of data and information and due to the scalability problem
currently in place, this can harm the speed and cost of transactions
. (Kessels & Avid, 2019)
• Royalty payments through smart contracts
Even though the provided solution is straight-forward and extremely beneficial for artists, the
feasibility might not be as straight-forward as we think. Payments on the blockchain happen through
cryptocurrencies, and with the recent market crash in the crypto market, the volatility might scare off a
lot of people to pay and receive money with cryptocurrencies. There is also no interoperability with
this scenario as users will have to use a certain cryptocurrency to stream music. Users will not be able
to do anything else with that currency aside of converting it into a FIAT currency or BTC.
(Kessels & Avid, 2019)
• Copyright
The first issue for the feasibility of our solutions is that they won’t work in a proper manner unless the
meta-database is adapted. As there is no legal framework that backs digital watermarking, it can be
extremely difficult to determine whether they have any legal or juridical value. The second issue that
holds back the feasibility is whether digital watermarks can be added on songs that have already been
released. Putting existing songs into this concept is one thing, but to update the correct right holders
within it is another thing.
(Kessels & Avid, 2019)
Piracy has existed for quite a while now and another factor to consider is that the spread of the internet
is huge. Custos tech argues that piracy detection needs to be in places where content get consumed by
the user and not where it gets distributed. The spread of the internet isn’t a very big issue according to
them as they made it feasible is by working with so-called bounty hunters. Bounty hunters are a
community of people that find pirated content in all the hidden corners of the internet, such as the dark
web. This blockchain project works with their own patented watermarking technology, which has
proved to work as Custos tech has reduced piracy from 60% to .06% through decentralised detection.
(Lutz, Van Rooyen, Salotto, Engelbrecht, & Nel, 2019)
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By utilizing a meta-database and Custos’ patented watermark technology, the copyright problem can
be solved. Whilst the meta-database solves the problem that the industry has with the synchronization
of several different databases, Custos takes care of any piracy related issues. Thankfully, there are
many more music blockchain projects that aim to solve other issues that the industry is facing.
Therefore, the projects relevant to the provided problem sets will be presented in the following
subchapter.
4.2 Current applications of blockchain within the music industry
Audius
The Audius project is an innovative decentralised application that has already managed to adopt itself
within the industry. The idea is to create a completely decentralised streaming platform. Audius tried
to differentiate itself from its competitors by not taking a cut of artists’ revenue. 90% of the revenues
obtained will be sent to the music curators whilst the other 10% goes to stakers that support the
platform. The payout happens through Audius’ own currency called “AUDIO”. This currency is built
on the Ethereum blockchain which Stakers are investors that lock their crypto holdings in a wallet in
order to participate in the important consensus process. This essentially means that they approve and
verify transactions on the blockchain in order to receive rewards.
(Binance, 2021)
The benefits come from the fact that artists don’t have to use a middleman such as a music distributor
to upload their music as Audius charges no cost to upload your music. The issue with Audius is that
due to the decentralized nodes they use, copyright cannot be protected (yet).
(Genç, 2021)
Audius might be one of the most important music crypto projects out there. In 2021, they landed a
partnership with media giant TikTok. The partnership allowed artists’ on the Audius platform to
upload their music to TikTok in order for them to be used in videos.
(Locke, 2021)
Open Music Initiative (OMI)
The Berklee College of Music Institute for Creative Entrepreneurship started a collaboration with MIT
Media Lab and IDEO to create a non-profit blockchain project that helps with the identification of
copyright holders (Yacik, 2017). With blockchain technology, they want to create a distributed ledgers
that enables different databases and apps to interoperate with each other (Yacik, 2017). They stated
that in order for this to work, the metadata associated with copyrights and royalty tracking should be
strong (Yacik, 2017).
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4.3 Barriers and burdens
Status quo
The most powerful party in the industry are the music labels. The IFPI’s global music report shows
that the global music industry made 25.9 million dollars in revenue, 72.20% of which was generated
through Sony, Universal and Warner (IFPI, 2022). This shows how powerful the oligopoly is and in
order to integrate blockchain technology in the music industry, acceptance of the technology from
these big players is necessary. In order for an efficient integration to happen, it is not only the music
labels that have to accept it, but also other players such as music publishers, streaming services and all
others involved in the value chain of the music industry. The information disparity is only
disadvantageous to audio content creators and not music labels, so convincing these labels to opt for a
meta-database might be difficult (Kessels & Avid, 2019).
Maturity
Blockchain technology is still in its early stage since the official launch in 2009. According to Vasja
Veber (2019), the general public’s idea surrounding blockchain technology is wrong, as many people
see the cryptocurrencies on the blockchain as a get rich quick scheme. The occasional decline in the
prices of cryptocurrencies don’t help and the willingness of the general public to take part in a music
crypto project might decline (Veber, 2019). Aside of that, he argues that there are still too many issues
within the blockchain that prevent widespread adoption such as the well known scalability issue that
will potentially harm the speed and cost of transactions (Veber, 2019). Hundreds if not thousands of
songs are released everyday and if the scalability issue does not get resolved, the adoption of
blockchain in the music industry will virtually be impossible.
Legal framework
One of the main issues preventing widespread adoption of blockchain technology is the lack of a legal
framework. As blockchain is a relatively new technology, adapting it to the current law would be
unfair. The General Data Protection Regulation, better known as the GDPR, governs laws surrounding
the protection of data in the European Union (Frankenfield, 2020). The issue arises from the fact that
blockchain technology does not comply with the GDPR. Here is a well known GDPR law:
• Right to be forgotten: This implies that an individual can ask to have their data removed from
the database (Petters, 2020). The immutability of blockchain technology, which was one of
the advantages, works as a disadvantage in the legal framework. This is because data cannot
be deleted on the blockchain.
(Kessels & Avid, 2019)
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Therefore, certain companies have opted to use different types of blockchains that do comply with
certain regulations. An example of a different type of blockchain is a private blockchain. These are
private networks where a central entity controls the participants within that network. The central entity
assigns roles to everyone that has access to the network, these roles include mining rights or the ability
to make transactions. Sadly, due to the central entity, the decentralization aspect of blockchain fades
away.
(Vardai, 2021)
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5 CONCLUSION
The music industry has some relevant problems that seem to harm almost everyone involved in the
music value chain, except for music labels themselves. Thankfully, blockchain technology provides
solutions for these problems whilst providing decentralization and democratization opportunities. The
theoretical application of blockchain technology and the relevant problem sets have given us several
potential solutions.
Yet, there are big barriers to face in order to gain widespread adoption throughout the industry. These
barriers both come from internal and external factors. Blockchain itself hasn’t been around for a long
time, but the developments within the technology have been expanding at a staggering rate. Aside of
building applications on the tech, notable experts are also trying to solve internal problems such as the
scalability by providing several solutions such as “Sharding” and “Proof-of-Stake” (Kaur & Gandhi,
2020).
The landscape of blockchain technology is evolving in such a fast rate that no one knows how far the
advancements will be in the next 10 years. It is necessary to solve the internal factors of blockchain
technology first to make the technology as strong and foolproof as possible. The WEF confirmed that
blockchain- and crypto regulations are on their way (Ho, English, Rothamel, Cao, & Xiao, 2021).
Blockchain technology and smart contracts have the potential to completely change the ecosystem of
the music industry. But it is vital to have a clear and embedded legal framework whilst simultaneously
solving the small issues within the technology. It is almost impossible to not see blockchain
technology in the future of the music industry. These barriers and burdens are temporary and once
resolved, the adoption can finally begin.
It is not a matter of if, but a matter of when blockchain technology will revolutionize the ecosystem of
the music industry.
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